W H G D O M W H G D O MM N. RLvMIMISES INSTITUTE Copyright © 1991, 2005, 2008 Ludwig von Mises InstituteCopyright © 1963, 1985, 1990 by Murray N. RothbardCopyright © 2005 Ludwig von Mises Institute, fifth editionCopyright © 2010 Ludwig von Mises Institute and publishedunder the Creative Commons Attribution License 3.0.http://creativecommons.org/licenses/by/3.0/Published by Ludwig von Mises Institute, 518 West Magnolia Avenue,Auburn, Alabama 36832Mises.orgISBN: 978-1-61016-142-8 vCI. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1II. Money in a Free Society . . . . . . . . . . . . . . . . . . . . 41. The Value of Exchange. . . . . . . . . . . . . . . . . . 42. Barter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53. Indirect Exchange . . . . . . . . . . . . . . . . . . . . . 64. Benefits of Money . . . . . . . . . . . . . . . . . . . . 105. The Monetary Unit . . . . . . . . . . . . . . . . . . . 126. The Shape of Money. . . . . . . . . . . . . . . . . . . 157. Private Coinage . . . . . . . . . . . . . . . . . . . . . . 168. The “Proper” Supply of Money. . . . . . . . . . . 209. The Problem of “Hoarding” . . . . . . . . . . . . . 2610. Stabilize the Price Level? . . . . . . . . . . . . . . . 3111. Coexisting Moneys . . . . . . . . . . . . . . . . . . . 3312. Money Warehouses . . . . . . . . . . . . . . . . . . . 3613. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 47III. Government Meddling With Money . . . . . . . . . 491. The Revenue of Government . . . . . . . . . . . . 492. The Economic Effects of Inflation . . . . . . . . 513. Compulsory Monopoly of the Mint . . . . . . . 564. Debasement . . . . . . . . . . . . . . . . . . . . . . . . . 585. Gresham’s Law and Coinage . . . . . . . . . . . . 59a. Bimetallism . . . . . . . . . . . . . . . . . . . . . . 59b. Legal Tender. . . . . . . . . . . . . . . . . . . . . . 626. Summary: Government and Coinage. . . . . . 647. Permitting Banks to Refuse Payment . . . . . . 658. Central Banking: Removing the Checkson Inflation . . . . . . . . . . . . . . . . . . . . . . . . . 68 vi What Has Government Done to Our Money?9. Central Banking: Directing the Inflation. . . 7310. Going Off the Gold Standard . . . . . . . . . . . 7511. Fiat Money and the Gold Problem . . . . . . . . 7812. Fiat Money and Gresham’s Law . . . . . . . . . . 8113. Government and Money . . . . . . . . . . . . . . . 85IV. The Monetary Breakdown of the West . . . . . . . . 881. Phase I: The Classical Gold Standard,1815–1914 . . . . . . . . . . . . . . . . . . . . . . . . . . 892. Phase II: World War I and After . . . . . . . . . 923. Phase III: The Gold Exchange Standard(Britain and the United States) 1926–1931 . . 934. Phase IV: Fluctuating Fiat Currencies,1931–1945 . . . . . . . . . . . . . . . . . . . . . . . . . . 965. Phase V: Bretton Woods and the NewGold Exchange Standard (the UnitedStates) 1945–1968 . . . . . . . . . . . . . . . . . . . . 986. Phase VI: The Unraveling of BrettonWoods, 1968–1971 . . . . . . . . . . . . . . . . . . 1027. Phase VII: The End of Bretton Woods:Fluctuating Fiat Currencies,August–December, 1971 . . . . . . . . . . . . . . 1058. Phase VIII: The Smithsonian Agreement,December 1971–February 1973 . . . . . . . . . 1069. Phase IX: Fluctuating Fiat Currencies,March 1973–? . . . . . . . . . . . . . . . . . . . . . . 108Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113About the Mises Institute . . . . . . . . . . . . . . . . . . . . . 117 1F more tangled, moreconfused than money. Wrangles abound over “tightmoney” vs. “easy money,” over the roles of the FederalReserve System and the Treasury, over various versionsof the gold standard, etc. Should the government pumpmoney into the economy or siphon it out? Whichbranch of the government? Should it encourage creditor restrain it? Should it return to the gold standard? Ifso, at what rate? These and countless other questionsmultiply, seemingly without end.Perhaps the Babel of views on the money questionstems from man’s propensity to be “realistic,” i.e., tostudy only immediate political and economic prob-lems. If we immerse ourselves wholly in day-to-dayaffairs, we cease making fundamental distinctions,or asking the really basic questions. Soon, basic issuesare forgotten, and aimless drift is substituted for firmadherence to principle. Often we need to gain perspec-tive, to stand aside from our everyday affairs in order tounderstand them more fully. This is particularly true inour economy, where interrelations are so intricate thatI.I 2 What Has Government Done to Our Money?we must isolate a few important factors, analyze them,and then trace their operations in the complex world.This was the point of “Crusoe economics,” a favoritedevice of classical economic theory. Analysis of Crusoeand Friday on a desert island, much abused by criticsas irrelevant to today’s world, actually performed thevery useful function of spotlighting the basic axiomsof human action.Of all the economic problems, money is possibly themost tangled, and perhaps where we most need per-spective. Money, moreover, is the economic area mostencrusted and entangled with centuries of governmentmeddling. Many people—many economists—usu-ally devoted to the free market stop short at money.Money, they insist, is different; it must be supplied bygovernment and regulated by government. They neverthink of state control of money as interference in thefree market; a free market in money is unthinkableto them. Governments must mint coins, issue paper,define “legal tender,” create central banks, pump moneyin and out, “stabilize the price level,” etc.Historically, money was one of the first things con-trolled by government, and the free market “revolution”of the eighteenth and nineteenth centuries made verylittle dent in the monetary sphere. So it is high timethat we turn fundamental attention to the life-bloodof our economy—money.Let us first ask ourselves the question: Can moneybe organized under the freedom principle? Can we havea free market in money as well as in other goods and Murray N. Rothbard 3services? What would be the shape of such a market?And what are the effects of various governmental con-trols? If we favor the free market in other directions, ifwe wish to eliminate government invasion of personand property, we have no more important task than toexplore the ways and means of a free market in money. 41.The Value of ExchangeH ? Clearly, Robinson Crusoehad no need for money. He could not have eaten goldcoins. Neither would Crusoe and Friday, perhapsexchanging fish for lumber, need to bother aboutmoney. But when society expands beyond a few fami-lies, the stage is already set for the emergence of money.To explain the role of money, we must go evenfurther back, and ask: why do men exchange at all?Exchange is the prime basis of our economic life.Without exchanges, there would be no real econ-omy and, practically, no society. Clearly, a voluntaryexchange occurs because both parties expect to benefit.An exchange is an agreement between A and B to trans-fer the goods or services of one man for the goods andservices of the other. Obviously, both benefit becauseeach values what he receives in exchange more thanwhat he gives up. When Crusoe, say, exchanges somefish for lumber, he values the lumber he “buys” moreII.M F S Murray N. Rothbard 5than the fish he “sells,” while Friday, on the contrary,values the fish more than the lumber. From Aristotle toMarx, men have mistakenly believed that an exchangerecords some sort of equality of value—that if onebarrel of fish is exchanged for ten logs, there is somesort of underlying equality between them. Actually, theexchange was made only because each party valuedthe two products in diff erent order.Why should exchange be so universal among man-kind? Fundamentally, because of the great variety innature: the variety in man, and the diversity of locationof natural resources. Every man has a different set ofskills and aptitudes, and every plot of ground has its ownunique features, its own distinctive resources. From thisexternal natural fact of variety come exchanges; wheatin Kansas for iron in Minnesota; one man’s medicalservices for another’s playing of the violin. Specializationpermits each man to develop his best skill, and allowseach region to develop its own particular resources. Ifno one could exchange, if every man were forced to becompletely self-sufficient, it is obvious that most of uswould starve to death, and the rest would barely remainalive. Exchange is the lifeblood, not only of our economy,but of civilization itself.2.BarterYet, direct exchange of useful goods and serviceswould barely suffice to keep an economy going above 6 What Has Government Done to Our Money?the primitive level. Such direct exchange—or barter—is hardly better than pure self-sufficiency. Why is this?For one thing, it is clear that very little productioncould be carried on. If Jones hires some laborers tobuild a house, with what will he pay them? Withparts of the house, or with building materials theycould not use? The two basic problems are “indivis-ibility” and “lack of coincidence of wants.” Thus, ifSmith has a plow, which he would like to exchangefor several different things—say, eggs, bread, anda suit of clothes—how can he do so? How can hebreak up the plow and give part of it to a farmer andanother part to a tailor? Even where the goods aredivisible, it is generally impossible for two exchangersto find each other at the same time. If A has a supplyof eggs for sale, and B has a pair of shoes, how canthey get together if A wants a suit? And think of theplight of an economics teacher who has to find anegg-producer who wants to purchase a few econom-ics lessons in return for his eggs! Clearly, any sort ofcivilized economy is impossible under direct exchange.3.Indirect ExchangeBut man discovered, in the process of trial and error,the route that permits a greatly-expanding economy:indirect exchange. Under indirect exchange, you sellyour product not for a good which you need directly,but for another good which you then, in turn, sell for Murray N. Rothbard 7the good you want. At first glance, this seems like aclumsy and round-about operation. But it is actuallythe marvelous instrument that permits civilization todevelop.Consider the case of A, the farmer, who wants tobuy the shoes made by B. Since B doesn’t want his eggs,he finds what B does want—let’s say butter. A thenexchanges his eggs for C’s butter, and sells the butterto B for shoes. He first buys the butter not because hewants it directly, but because it will permit him to gethis shoes. Similarly, Smith, a plow-owner, will sell hisplow for one commodity which he can more readilydivide and sell—say, butter—and will then exchangeparts of the butter for eggs, bread, clothes, etc. In bothcases, the superiority of butter—the reason there isextra demand for it beyond simple consumption—isits greater marketability. If one good is more market-able than another—if everyone is confident that it willbe more readily sold—then it will come into greaterdemand because it will be used as a medium of exchange.It will be the medium through which one specialist canexchange his product for the goods of other specialists.Now just as in nature there is a great varietyof skills and resources, so there is a variety in themarketability of goods. Some goods are more widelydemanded than others, some are more divisible intosmaller units without loss of value, some more durableover long periods of time, some more transportableover large distances. All of these advantages make forgreater marketability. It is clear that in every society, 8 What Has Government Done to Our Money?the most marketable goods will be gradually selectedas the media for exchange. As they are more and moreselected as media, the demand for them increasesbecause of this use, and so they become even moremarketable. The result is a reinforcing spiral: moremarketability causes wider use as a medium whichcauses more marketability, etc. Eventually, one or twocommodities are used as general media—in almostall exchanges—and these are called money.Historically, many different goods have been used asmedia: tobacco in colonial Virginia, sugar in the WestIndies, salt in Abyssinia, cattle in ancient Greece, nailsin Scotland, copper in ancient Egypt, and grain, beads,tea, cowrie shells, and fishhooks. Through the centu-ries, two commodities, gold and silver, have emerged asmoney in the free competition of the market, and havedisplaced the other commodities. Both are uniquelymarketable, are in great demand as ornaments, andexcel in the other necessary qualities. In recent times,silver, being relatively more abundant than gold, hasbeen found more useful for smaller exchanges, whilegold is more useful for larger transactions. At any rate,the important thing is that whatever the reason, thefree market has found gold and silver to be the mostefficient moneys.Th is process: the cumulative development of amedium of exchange on the free market—is the onlyway money can become established. Money cannotoriginate in any other way, neither by everyone sud-denly deciding to create money out of useless material, Murray N. Rothbard 9nor by government calling bits of paper “money.” Forembedded in the demand for money is knowledge ofthe money-prices of the immediate past; in contrast todirectly-used consumers’ or producers’ goods, moneymust have preexisting prices on which to grounda demand. But the only way this can happen is bybeginning with a useful commodity under barter, andthen adding demand for a medium for exchange to theprevious demand for direct use (e.g., for ornaments,in the case of gold).1 Thus, government is powerless tocreate money for the economy; it can only be developedby the processes of the free market.A most important truth about money now emergesfrom our discussion: money is a commodity. Learningthis simple lesson is one of the world’s most impor-tant tasks. So often have people talked about moneyas something much more or less than this. Moneyis not an abstract unit of account, divorceable froma concrete good; it is not a useless token only goodfor exchanging; it is not a “claim on society”; it isnot a guarantee of a fi xed price level. It is simply acommodity. It differs from other commodities inbeing demanded mainly as a medium of exchange.But aside from this, it is a commodity—and, likeall commodities, it has an existing stock, it facesdemands by people to buy and hold it, etc. Like all1 On the origin of money, cf. Carl Menger, Principles of Economics(Glencoe, Ill.: Free Press, 1950), pp. 257–71; Ludwig von Mises, TheTheory of Money and Credit, 3rd ed. (New Haven, Conn.: Yale UniversityPress, 1951), pp. 97–123. 10 What Has Government Done to Our Money?commodities, its “price”—in terms of other goods—isdetermined by the interaction of its total supply, orstock, and the total demand by people to buy andhold it. (People “buy” money by selling their goodsand services for it, just as they “sell” money whenthey buy goods and services.)4.Benefits of MoneyThe emergence of money was a great boon to thehuman race. Without money—without a generalmedium of exchange—there could be no real spe-cialization, no advancement of the economy abovea bare, primitive level. With money, the problems ofindivisibility and “coincidence of wants” that plaguedthe barter society all vanish. Now, Jones can hirelaborers and pay them in . . . money. Smith can sellhis plow in exchange for units of . . . money. Themoney-commodity is divisible into small units, andit is generally acceptable by all. And so all goods andservices are sold for money, and then money is used tobuy other goods and services that people desire. Becauseof money, an elaborate “structure of production” canbe formed, with land, labor services, and capital goodscooperating to advance production at each stage andreceiving payment in money.The establishment of money conveys another greatbenefit. Since all exchanges are made in money, all theexchange-ratios are expressed in money, and so people Murray N. Rothbard 11can now compare the market worth of each good tothat of every other good. If a TV set exchanges forthree ounces of gold, and an automobile exchangesfor sixty ounces of gold, then everyone can see thatone automobile is “worth” twenty TV sets on themarket. These exchange-ratios are prices, and themoney-commodity serves as a common denominatorfor all prices. Only the establishment of money-priceson the market allows the development of a civilizedeconomy, for only they permit businessmen to calcu-late economically. Businessmen can now judge howwell they are satisfying consumer demands by seeinghow the selling-prices of their products compare withthe prices they have to pay productive factors (their“costs”). Since all these prices are expressed in termsof money, the businessmen can determine whetherthey are making profits or losses. Such calculationsguide businessmen, laborers, and landowners in theirsearch for monetary income on the market. Onlysuch calculations can allocate resources to their mostproductive uses—to those uses that will most satisfythe demands of consumers.Many textbooks say that money has several func-tions: a medium of exchange, unit of account, or“measure of values,” a “store of value,” etc. But itshould be clear that all of these functions are simplycorollaries of the one great function: the medium ofexchange. Because gold is a general medium, it is mostmarketable, it can be stored to serve as a medium inthe future as well as the present, and all prices are 12 What Has Government Done to Our Money?expressed in its terms.2 Because gold is a commoditymedium for all exchanges, it can serve as a unit ofaccount for present, and expected future, prices. It isimportant to realize that money cannot be an abstractunit of account or claim, except insofar as it serves asa medium of exchange.5.The Monetary UnitNow that we have seen how money emerged, andwhat it does, we may ask: how is the money-commodityused? Specifically, what is the stock, or supply, of moneyin society, and how is it exchanged?In the first place, most tangible physical goods aretraded in terms of weight. Weight is the distinctiveunit of a tangible commodity, and so trading takesplace in terms of units like tons, pounds, ounces,grains, grams, etc.3 Gold is no exception. Gold, likeother commodities, will be traded in units of weight.4It is obvious that the size of the common unit cho-sen in trading makes no difference to the economist.One country, on the metric system, may prefer to figure2 Money does not “measure” prices or values; it is the common denomi-nator for their expression. In short, prices are expressed in money; theyare not measured by it.3 Even those goods nominally exchanging in terms of volume (bale,bushel, etc.) tacitly assume a standard weight per unit volume.4 One of the cardinal virtues of gold as money is its homogeneity—unlikemany other commodities, it has no differences in quality. An ounce ofpure gold equals any other ounce of pure gold the world over. Murray N. Rothbard 13in grams; England or America may prefer to reckonin grains or ounces. All units of weight are convertibleinto each other; one pound equals sixteen ounces; oneounce equals 437.5 grains or 28.35 grams, etc.Assuming gold is chosen as the money, the size ofthe gold-unit used in reckoning is immaterial to us.Jones may sell a coat for one gold ounce in America,or for 28.35 grams in France; both prices are identical.All this might seem like laboring the obvious,except that a great deal of misery in the world wouldhave been avoided if people had fully realized thesesimple truths. Nearly everyone, for example, thinksof money as abstract units for something or other,each cleaving uniquely to a certain country. Evenwhen countries were on the “gold standard,” peoplethought in similar terms. American money was “dol-lars,” French was “francs,” German “marks,” etc.All these were admittedly tied to gold, but all wereconsidered sovereign and independent, and hence itwas easy for countries to “go off the gold standard.”Yet all of these names were simply names for units ofweight of gold or silver.The British “pound sterling” originally signifieda pound weight of silver. And what of the dollar?The dollar began as the generally applied name of anounce weight of silver coined by a Bohemian Countnamed Schlick, in the sixteenth century. The Countof Schlick lived in Joachim’s Valley or Jaochimsthal.The Count’s coins earned a great reputation for theiruniformity and fineness, and they were widely called 14 What Has Government Done to Our Money?“Joachim’s thalers,” or, finally, “thaler.” The name“dollar” eventually emerged from “thaler.”On the free market, then, the various names thatunits may have are simply definitions of units of weight.When we were “on the gold standard” before 1933,people liked to say that the “price of gold” was “fixedat twenty dollars per ounce of gold.” But this was adangerously misleading way of looking at our money.Actually, “the dollar” was defined as the name for(approximately) 1⁄20 of an ounce of gold. It was there-fore misleading to talk about “exchange rates” of onecountry’s currency for another. The “pound sterling”did not really “exchange” for five “dollars.”5 The dol-lar was defined as 1⁄20 of a gold ounce, and the poundsterling was, at that time, defined as the name for ¼of a gold ounce, simply traded for 5 ⁄20 of a gold ounce.Clearly, such exchanges, and such a welter of names,were confusing and misleading. How they arose isshown below in the chapter on government meddlingwith money. In a purely free market, gold wouldsimply be exchanged directly as “grams,” grains, orounces, and such confusing names as dollars, francs,etc., would be superfluous. Therefore, in this section,we will treat money as exchanging directly in termsof ounces or grams.Clearly, the free market will choose as the commonunit whatever size of the money-commodity is most5 Actually, the pound sterling exchanged for $4.87, but we are using $5for greater convenience of calculation. Murray N. Rothbard 15convenient. If platinum were the money, it would likelybe traded in terms of fractions of an ounce; if iron wereused, it would be reckoned in pounds or tons. Clearly,the size makes no difference to the economist.6.The Shape of MoneyIf the size or the name of the money-unit makeslittle economic difference; neither does the shape of themonetary metal. Since the commodity is the money,it follows that the entire stock of the metal, so long asit is available to man, constitutes the world’s stock ofmoney. It makes no real difference what shape any ofthe metal is at any time. If iron is the money, then allthe iron is money, whether it is in the form of bars,chunks, or embodied in specialized machinery.6 Goldhas been traded as money in the raw form of nuggets,as gold dust in sacks, and even as jewelry. It shouldnot be surprising that gold, or other moneys, can betraded in many forms, since their important featureis their weight.It is true, however, that some shapes are often moreconvenient than others. In recent centuries, gold andsilver have been broken down into coins, for smaller,day-to-day transactions, and into larger bars for biggertransactions. Other gold is transformed into jewelryand other ornaments. Now, any kind of transformation6 Iron hoes have been used extensively as money, both in Asia and Africa. 16 What Has Government Done to Our Money?from one shape to another costs time, effort, and otherresources. Doing this work will be a business like anyother, and prices for this service will be set in the usualmanner. Most people agree that it is legitimate forjewelers to make ornaments out of raw gold, but theyoften deny that the same applies to the manufactureof coins. Yet, on the free market, coinage is essentiallya business like any other.Many people believed, in the days of the gold stan-dard, that coins were somehow more “really” moneythan plain, uncoined gold “bullion” (bars, ingots, orany other shape). It is true that coins commanded apremium over bullion, but this was not caused by anymysterious virtue in the coins; it stemmed from the factthat it cost more to manufacture coins from bullionthan to remelt coins back into bullion. Because of thisdifference, coins were more valuable on the market.7.Private CoinageThe idea of private coinage seems so strange todaythat it is worth examining carefully. We are used tothinking of coinage as a “necessity of sovereignty.” Yet,after all, we are not wedded to a “royal prerogative,”and it is the American concept that sovereignty rests,not in government, but in the people.How would private coinage work? In the sameway, we have said, as any other business. Each minterwould produce whatever size or shape of coin is most Murray N. Rothbard 17pleasing to his customers. The price would be set bythe free competition of the market.The standard objection is that it would be toomuch trouble to weigh or assay bits of gold at everytransaction. But what is there to prevent private mintersfrom stamping the coin and guaranteeing its weightand fineness? Private minters can guarantee a coin atleast as well as a government mint. Abraded bits ofmetal would not be accepted as coin. People woulduse the coins of those minters with the best reputationfor good quality of product. We have seen that this isprecisely how the “dollar” became prominent—as acompetitive silver coin.Opponents of private coinage charge that fraudwould run rampant. Yet, these same opponents wouldtrust government to provide the coinage. But if govern-ment is to be trusted at all, then surely, with privatecoinage, government could at least be trusted to preventor punish fraud. It is usually assumed that the preven-tion or punishment of fraud, theft, or other crimes isthe real justification for government. But if governmentcannot apprehend the criminal when private coinageis relied upon, what hope is there for a reliable coinagewhen the integrity of the private market place opera-tors is discarded in favor of a government monopolyof coinage? If government cannot be trusted to ferretout the occasional villain in the free market in coin,why can government be trusted when it finds itselfin a position of total control over money and maydebase coin, counterfeit coin, or otherwise with full 18 What Has Government Done to Our Money?legal sanction perform as the sole villain in the marketplace? It is surely folly to say that government mustsocialize all property in order to prevent anyone fromstealing property. Yet the reasoning behind abolitionof private coinage is the same.Moreover, all modern business is built on guaran-tees of standards. The drug store sells an eight ouncebottle of medicine; the meat packer sells a pound ofbeef. The buyer expects these guarantees to be accu-rate, and they are. And think of the thousands uponthousands of specialized, vital industrial products thatmust meet very narrow standards and specifications.The buyer of a ½ inch bolt must get a ½ inch bolt andnot a mere 3⁄8 inch.Yet, business has not broken down. Few peoplesuggest that the government must nationalize themachine-tool industry as part of its job of defendingstandards against fraud. The modern market economycontains an infinite number of intricate exchanges,most depending on definite standards of quantityand quality. But fraud is at a minimum, and thatminimum, at least in theory, may be prosecuted. So itwould be if there were private coinage. We can be surethat a minter’s customers, and his competitors, wouldbe keenly alert to any possible fraud in the weight orfineness of his coins.77 See Herbert Spencer, Social Statics (New York: D. Appleton 1890),p. 438. Murray N. Rothbard 19Champions of the government’s coinage monopolyhave claimed that money is different from all othercommodities, because “Gresham’s Law” proves that“bad money drives out good” from circulation. Hence,the free market cannot be trusted to serve the publicin supplying good money. But this formulation restson a misinterpretation of Gresham’s famous law. Thelaw really says that “money overvalued artificially bygovernment will drive out of circulation artificiallyundervalued money.” Suppose, for example, there areone-ounce gold coins in circulation. After a few yearsof wear and tear, let us say that some coins weigh only.9 ounces. Obviously, on the free market, the worncoins would circulate at only 90 percent of the valueof the full-bodied coins, and the nominal face-value ofthe former would have to be repudiated.8 If anything,it will be the “bad” coins that will be driven from themarket. But suppose the government decrees thateveryone must treat the worn coins as equal to new,fresh coins, and must accept them equally in paymentof debts. What has the government really done? It hasimposed price control by coercion on the “exchangerate” between the two types of coin. By insisting onthe par-ratio when the worn coins should exchangeat 10 percent discount, it artificially overvalues the8 To meet the problem of wear-and-tear, private coiners might either seta time limit on their stamped guarantees of weight, or agree to recoinanew, either at the original or at the lower weight. We may note that inthe free economy there will not be the compulsory standardization ofcoins that prevails when government monopolies direct the coinage. 20 What Has Government Done to Our Money?worn coins and undervalues new coins. Consequently,everyone will circulate the worn coins, and hoard orexport the new. “Bad money drives out good money,”then, not on the free market, but as the direct resultof governmental intervention in the market.Despite never-ending harassment by governments,making conditions highly precarious, private coinshave flourished many times in history. True to thevirtual law that all innovations come from free indi-viduals and not the state, the first coins were mintedby private individuals and goldsmiths. In fact, whenthe government first began to monopolize the coinage,the royal coins bore the guarantees of private bankers,whom the public trusted far more, apparently, thanthey did the government. Privately-minted gold coinscirculated in California as late as 1848.98.The “Proper” Supply of MoneyNow we may ask: what is the supply of money insociety and how is that supply used? In particular, wemay raise the perennial question, how much money9 For historical examples of private coinage, see B.W. Barnard, “The useof Private Tokens for Money in the United States,” Quarterly Journal ofEconomics (1916–17): 617–26; Charles A. Conant, The Principles of Moneyand Banking (New York: Harper Bros., 1905), vol. I, pp. 127–32; LysanderSpooner, A Letter to Grover Cleveland (Boston: B.R. Tucker, 1886), p. 79;and J. Laurence Laughlin, A New Exposition of Money, Credit and Prices(Chicago: University of Chicago Press, 1931), vol. I, pp. 47–51. On coin-age, also see Mises, Theory of Money and Credit, pp. 65–67; and EdwinCannan, Money, 8th ed. (London: Staples Press, 1935), pp. 33ff. Murray N. Rothbard 21“do we need”? Must the money supply be regulatedby some sort of “criterion,” or can it be left alone tothe free market?First, the total stock, or supply, of money in society atany one time, is the total weight of the existing money-stuff. Let us assume, for the time being, that only onecommodity is established on the free market as money.Let us further assume that gold is that commodity(although we could have taken silver, or even iron; itis up to the market, and not to us, to decide the bestcommodity to use as money). Since money is gold, thetotal supply of money is the total weight of gold existingin society. The shape of gold does not matter—exceptif the cost of changing shapes in certain ways is greaterthan in others (e.g., minting coins costing more thanmelting them). In that case, one of the shapes will bechosen by the market as the money-of-account, andthe other shapes will have a premium or discount inaccordance with their relative costs on the market.Changes in the total gold stock will be gov-erned by the same causes as changes in other goods.Increases will stem from greater production frommines; decreases from being used up in wear andtear, in industry, etc. Because the market will choosea durable commodity as money, and because money isnot used up at the rate of other commodities—but isemployed as a medium of exchange—the proportionof new annual production to its total stock will tendto be quite small. Changes in total gold stock, then,generally take place very slowly. 22 What Has Government Done to Our Money?What “should” the supply of money be? All sortsof criteria have been put forward: that money shouldmove in accordance with population, with the “volumeof trade,” with the “amounts of goods produced,” soas to keep the “price level” constant, etc. Few indeedhave suggested leaving the decision to the market. Butmoney differs from other commodities in one essentialfact. And grasping this difference furnishes a key tounderstanding monetary matters. When the supplyof any other good increases, this increase confers asocial benefit; it is a matter for general rejoicing. Moreconsumer goods mean a higher standard of living forthe public; more capital goods mean sustained andincreased living standards in the future. The discoveryof new, fertile land or natural resources also promises toadd to living standards, present and future. But whatabout money? Does an addition to the money supplyalso benefit the public at large?Consumer goods are used up by consumers; capitalgoods and natural resources are used up in the processof producing consumer goods. But money is not usedup; its function is to act as a medium of exchanges—toenable goods and services to travel more expeditiouslyfrom one person to another. These exchanges are allmade in terms of money prices. Thus, if a televisionset exchanges for three gold ounces, we say that the“price” of the television set is three ounces. At anyone time, all goods in the economy will exchange atcertain gold-ratios or prices. As we have said, money,or gold, is the common denominator of all prices. But Murray N. Rothbard 23what of money itself? Does it have a “price”? Since aprice is simply an exchange-ratio, it clearly does. But,in this case, the “price of money” is an array of theinfinite number of exchange-ratios for all the variousgoods on the market.Thus, suppose that a television set costs three goldounces, an auto sixty ounces, a loaf of bread 1⁄100 of anounce, and an hour of Mr. Jones’s legal services oneounce. The “price of money” will then be an arrayof alternative exchanges. One ounce of gold will be“worth” either 1⁄3 of a television set, 1⁄60 of an auto, 100loaves of bread, or one hour of Jones’s legal service.And so on down the line. The price of money, then,is the “purchasing power” of the monetary unit—inthis case, of the gold ounce. It tells what that ouncecan purchase in exchange, just as the money-price ofa television set tells how much money a television setcan bring in exchange.What determines the price of money? The sameforces that determine all prices on the market—thatvenerable but eternally true law: “supply and demand.”We all know that if the supply of eggs increases, theprice will tend to fall; if the buyers’ demand for eggsincreases, the price will tend to rise. The same is truefor money. An increase in the supply of money willtend to lower its “price;” an increase in the demand formoney will raise it. But what is the demand for money?In the case of eggs, we know what “demand” means; itis the amount of money consumers are willing to spendon eggs, plus eggs retained and not sold by suppliers. 24 What Has Government Done to Our Money?Similarly, in the case of money, “demand” means thevarious goods offered in exchange for money, plus themoney retained in cash and not spent over a certaintime period. In both cases, “supply” may refer to thetotal stock of the good on the market.What happens, then, if the supply of gold increases,demand for money remaining the same? The “price ofmoney” falls, i.e., the purchasing power of the money-unit will fall all along the line. An ounce of gold willnow be worth less than 100 loaves of bread, 1⁄3 of atelevision set, etc. Conversely, if the supply of goldfalls, the purchasing power of the gold-ounce rises.What is the effect of a change in the money supply?Following the example of David Hume, one of the firsteconomists, we may ask ourselves what would happen if,overnight, some good fairy slipped into pockets, purses,and bank vaults, and doubled our supply of money.In our example, she magically doubled our supply ofgold. Would we be twice as rich? Obviously not. Whatmakes us rich is an abundance of goods, and what limitsthat abundance is a scarcity of resources: namely land,labor, and capital. Multiplying coin will not whisk theseresources into being. We may feel twice as rich for themoment, but clearly all we are doing is diluting the moneysupply. As the public rushes out to spend its new-foundwealth, prices will, very roughly, double—or at least riseuntil the demand is satisfied, and money no longer bidsagainst itself for the existing goods.Thus, we see that while an increase in the moneysupply, like an increase in the supply of any good, Murray N. Rothbard 25lowers its price, the change does not—unlike othergoods—confer a social benefit. The public at large isnot made richer. Whereas new consumer or capitalgoods add to standards of living, new money onlyraises prices—i.e., dilutes its own purchasing power.The reason for this puzzle is that money is only usefulfor its exchange value. Other goods have various “real”utilities, so that an increase in their supply satisfiesmore consumer wants. Money has only utility for pro-spective exchange; its utility lies in its exchange value,or “purchasing power.” Our law—that an increase inmoney does not confer a social benefit—stems fromits unique use as a medium of exchange.An increase in the money supply, then, only dilutesthe effectiveness of each gold ounce; on the other hand,a fall in the supply of money raises the power of eachgold ounce to do its work. We come to the startlingtruth that it doesn’t matter what the supply of money is.Any supply will do as well as any other supply. The freemarket will simply adjust by changing the purchasingpower, or effectiveness of the gold-unit. There is noneed to tamper with the market in order to alter themoney supply that it determines.At this point, the monetary planner might object:“All right, granting that it is pointless to increase themoney supply, isn’t gold mining a waste of resources?Shouldn’t the government keep the money supplyconstant, and prohibit new mining?” This argumentmight be plausible to those who hold no principledobjections to government meddling, though it would 26 What Has Government Done to Our Money?not convince the determined advocate of liberty. Butthe objection overlooks an important point: that goldis not only money, but is also, inevitably, a commod-ity. An increased supply of gold may not confer anymonetary benefit, but it does confer a non-monetarybenefit—i.e., it does increase the supply of gold usedin consumption (ornaments, dental work, and the like)and in production (industrial work). Gold mining,therefore, is not a social waste at all.We conclude, therefore, that determining the supplyof money, like all other goods, is best left to the freemarket. Aside from the general moral and economicadvantages of freedom over coercion, no dictatedquantity of money will do the work better, and the freemarket will set the production of gold in accordancewith its relative ability to satisfy the needs of consum-ers, as compared with all other productive goods.109.The Problem of “Hoarding”The critic of monetary freedom is not so easilysilenced, however. There is, in particular, the ancientbugbear of “hoarding.” The image is conjured up ofthe selfish old miser who, perhaps irrationally, perhapsfrom evil motives, hoards up gold unused in his cel-lar or treasure trove—thereby stopping the flow of10 Gold mining is, of course, no more profitable than any other business;in the long-run, its rate of return will be equal to the net rate of returnin any other industry. Murray N. Rothbard 27circulation and trade, causing depressions and otherproblems. Is hoarding really a menace?In the first place, what has simply happened is anincreased demand for money on the part of the miser.As a result, prices of goods fall, and the purchasingpower of the gold-ounce rises. There has been no lossto society, which simply carries on with a lower activesupply of more “powerful” gold ounces.Even in the worst possible view of the matter, then,nothing has gone wrong, and monetary freedom cre-ates no difficulties. But there is more to the problemthan that. For it is by no means irrational for peopleto desire more or less money in their cash balances.Let us, at this point, study cash balances further.Why do people keep any cash balances at all? Supposethat all of us were able to foretell the future with abso-lute certainty. In that case, no one would have to keepcash balances on hand. Everyone would know exactlyhow much he will spend, and how much income hewill receive, at all future dates. He need not keep anymoney at hand, but will lend out his gold so as toreceive his payments in the needed amounts on thevery days he makes his expenditures. But, of course,we necessarily live in a world of uncertainty. People donot precisely know what will happen to them, or whattheir future incomes or costs will be. The more uncer-tain and fearful they are, the more cash balances theywill want to hold; the more secure, the less cash theywill wish to keep on hand. Another reason for keepingcash is also a function of the real world of uncertainty. 28 What Has Government Done to Our Money?If people expect the price of money to fall in the nearfuture, they will spend their money now while moneyis more valuable, thus “dishoarding” and reducing theirdemand for money. Conversely, if they expect the priceof money to rise, they will wait to spend money laterwhen it is more valuable, and their demand for cashwill increase. People’s demands for cash balances, then,rise and fall for good and sound reasons.Economists err if they believe something is wrongwhen money is not in constant, active “circulation.”Money is only useful for exchange value, true, but itis not only useful at the actual moment of exchange. Thistruth has been often overlooked. Money is just as usefulwhen lying “idle” in somebody’s cash balance, evenin a miser’s “hoard.”11 For that money is being heldnow in wait for possible future exchange—it suppliesto its owner, right now, the usefulness of permittingexchanges at any time—present or future—the ownermight desire.It should be remembered that all gold must beowned by someone, and therefore that all gold mustbe held in people’s cash balances. If there are 3,000tons of gold in the society, all 3,000 tons must beowned and held, at any one time, in the cash balancesof individual people. The total sum of cash balancesis always identical with the total supply of money11 At what point does a man’s cash balance become a faintly disreputable“hoard,” or the prudent man a miser? It is impossible to fi x any definitecriterion: generally, the charge of “hoarding” means that A is keepingmore cash than B thinks is appropriate for A. Murray N. Rothbard 29in the society. Thus, ironically, if it were not for theuncertainty of the real world, there could be no mon-etary system at all! In a certain world, no one wouldbe willing to hold cash, so the demand for money insociety would fall infinitely, prices would skyrocketwithout end, and any monetary system would breakdown. Instead of the existence of cash balances beingan annoying and troublesome factor, interfering withmonetary exchange, it is absolutely necessary to anymonetary economy.It is misleading, furthermore, to say that money“circulates.” Like all metaphors taken from the physicalsciences, it connotes some sort of mechanical process,independent of human will, which moves at a certainspeed of flow, or “velocity.” Actually, money does not“circulate”; it is, from time, to time, transferred fromone person’s cash balance to another’s. The existence ofmoney, once again, depends upon people’s willingnessto hold cash balances.At the beginning of this section, we saw that “hoard-ing” never brings any loss to society. Now, we will seethat movement in the price of money caused by changesin the demand for money yields a positive social ben-efit—as positive as any conferred by increased suppliesof goods and services. We have seen that the total sumof cash balances in society is equal and identical withthe total supply of money. Let us assume the supplyremains constant, say at 3,000 tons. Now, suppose, forwhatever reason—perhaps growing apprehension—people’s demand for cash balances increases. Surely,